U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20493 / March 13, 2008
Accounting and Auditing Enforcement Release No. 2798 / March 13, 2008
SEC v. Lorine Sweeney and Gary Scherping, Civ. No. 07-CV-01511 (WYD-MEH) (D. Colo.)
Former CEO and CFO of Quovadx, Inc., Lorine R. Sweeney and Gary T. Scherping, Agree to Settle SEC Action Charging Them With Fraudulent Revenue Recognition in 2003; Relief Includes Officer-And-Director Bars and Civil Penalties
The Commission announced today that final judgments were entered on February 29, 2008, against Lorine R. Sweeney and Gary T. Scherping, the former CEO and CFO of Quovadx, Inc., in the SEC’s enforcement action charging them with orchestrating a fraudulent revenue recognition scheme at the company during 2003. The final judgments permanently enjoin them from violating the antifraud provisions of the federal securities laws, circumventing internal controls, falsifying books and records, making false statements to an auditor, and falsely certifying public filings (Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, thereunder), as well as aiding and abetting violations of the reporting, books and records, and internal control provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13). They also impose five-year officer and director bars and a $75,000 civil penalty against Sweeney and a $70,000 civil penalty against Scherping. Without admitting or denying the allegations of the Commission’s previously-filed complaint, Sweeney and Scherping consented to the entry of the final judgments.
The Commission’s complaint alleges that Sweeney and Scherping orchestrated the fraudulent recognition of over $12 million in software licensing revenue between the second and fourth quarters of 2003, by Quovadx, then a Colorado-based software development and licensing company (now known as Healthvision). The complaint alleges that, as a result, Quovadx overstated its software revenue by approximately 9 percent to nearly 180 percent. The Complaint also alleges that Sweeney and Scherping aided and abetted Quovadx’s premature recognition of $250,000 in revenue into the third quarter of 2002, overstating its software licensing revenue by 10 percent for that quarter. The Complaint further alleges that Sweeney and Scherping made false representations to Quovadx’s auditor and signed false disclosure certifications in connection with Quovadx’s reports on Form 10-Q for the pertinent quarters and its annual report on Form 10-K for 2003. Finally, the Complaint alleges that Sweeney and Scherping circumvented internal accounting controls and falsified books and records in connection with the improper transactions.
In a related enforcement action, the Commission instituted today a settled proceeding against Scherping pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending him from the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after five years. Exchange Act Release No. 34- 57490 (March 13, 2008).
The Commission had previously brought settled enforcement proceedings against Quovadx, the principal officers and employees of Quovadx involved in the revenue recognition fraud, and the principals of the third-parties who aided and abetted that fraud. The settlements with Sweeney and Scherping conclude the Commission’s investigation into this matter.
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